What Is The Right Supply Chain For Your Product?

What Is the Right Supply Chain for Your Product?

A simple framework can help you figure out the answer.

Never has so much technology and brainpower been applied to improving supply chain performance. Point-of sale scanners allow companies to capture the customer's voice. Electronic data interchange lets all stages of the supply chain hear that voice and react to it by using flexible manufacturing, automated warehousing, and rapid logistics. And new concepts such as quick response, efficient consumer response, accurate response, mass customization, lean manufacturing, and agile manufacturing offer models for applying the new technology to improve performance.

Nonetheless, the performance of many supply chains has never been worse. In some cases, costs have risen to unprecedented levels because of adversarial relations between supply chain partners as well as dysfunctional industry practices such as an overreliance on price promotions. One recent study of the U.S. food industry estimated that poor coordination among supply chain partners was wasting $30 billion annually. Supply chains in many other industries suffer from an excess of some products and a shortage of others owing to an inability to predict demand. One department store chain that regularly had to resort to markdowns to clear unwanted merchandise found in exit interviews that one-quarter of its customers had left its stores empty-handed because the specific items they had wanted to buy were out of stock.

Before devising a supply chain, consider the nature of the demand for your products.

Why haven't the new ideas and technologies led to improved performance? Because managers lack a framework for deciding which ones are best for their particular company's situation. From my ten years of research and consulting on supply chain issues in industries as diverse as food, fashion apparel, and automobiles, I have been able to devise such a framework. It helps managers understand the nature of the demand for their products and devise the supply chain that can best satisfy that demand. The first step in devising an effective supply chain strategy is therefore to consider the nature of the demand for the products one's company supplies.

Many aspects are important - for example, product life cycle, demand predictability, product

variety, and market standards for lead times and service (the percentage of demand filled from instock goods). But I have found that if one classifies products on the basis of their demand patterns, they fall into one of two categories: they are either primarily functional or primarily innovative. And each category requires a distinctly different kind of supply chain. The root cause of the problems plaguing many supply chains is a mismatch between the type of product and the type of supply chain.

Is Your Product Functional or Innovative?

Functional products include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. Because such products satisfy basic needs, which don't change much over time, they have stable, predictable demand and long life cycles. But their stability invites competition, which often leads to low profit margins.

To avoid low margins, many companies introduce innovations in fashion or technology to give

customers an additional reason to buy their offerings. Fashion apparel and personal computers are

obvious examples, but we also see successful product innovation where we least expect it. For instance, in the traditionally functional category of food, companies such as Ben & Jerry's, Mrs. Fields, and Starbucks Coffee Company have tried to gain an edge with designer flavors and innovative concepts. Century Products, a leading manufacturer of children's car seats, is another company that brought innovation to a functional product. Until the early 1990s, Century sold its seats as functional items. Then it introduced a wide variety of brightly colored fabrics and designed a new seat that would move in a crash to absorb energy and protect the child sitting in it.

Called Smart Move, the design was so innovative that the seat could not be sold until government

product-safety standards mandating that car seats not move in a crash had been changed.

Although innovation can enable a company to achieve higher profit margins, the very newness of innovative products makes demand for them unpredictable. In addition, their life cycle is short - usually just a few months - because as imitators erode the competitive advantage that innovative products enjoy, companies are forced to introduce a steady stream of newer innovations. The short life cycles and the great variety typical of these products further increase unpredictability.

It may seem strange to lump technology and fashion together, but both types of innovation depend for their success on consumers changing some aspect of their values or lifestyle. For example, the market success of the IBM Thinkpad hinged in part on a novel cursor control in the middle of the keyboard that required users to interact with the keyboard in an unfamiliar way. The new design was so controversial within IBM that managers had difficulty believing the enthusiastic reaction to the cursor control in early focus groups. As a result, the company underestimated demand - a problem that contributed to the Thinkpad's being in short supply for more than a year.

With their high profit margins and volatile demand, innovative products require a fundamentally different supply chain than stable, low-margin functional products do.

Marshall L. Fisher is the Stephen J. Heyman Professor of Operations and Information Management and codirector of the Fishman-Davidson Center for Service and Operations Management at the University of Pennsylvania's Wharton School in Philadelphia. His current research focuses on how to manage the supply of products with hard-to-predict demand.

To understand the difference, one should recognize that a supply chain performs two distinct types of functions: a physical function and a market mediation function. A supply chain's physical function is readily apparent and includes converting raw materials into parts, components, and eventually finished goods, and transporting all of them from one point in the supply chain to the next. Less visible but equally important is market mediation, whose purpose is ensuring that the variety of products reaching the marketplace matches